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Were Hedge Funds Right About Warming Up To Quest Diagnostics (DGX)?

Nina Todic

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Quest Diagnostics Incorporated (NYSE:DGX).

Is Quest Diagnostics Incorporated (NYSE:DGX) a bargain? The smart money is becoming hopeful. The number of bullish hedge fund positions increased by 2 recently. Our calculations also showed that DGX isn't among the 30 most popular stocks among hedge funds.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Dmitry Balyasny

Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a glance at the key hedge fund action encompassing Quest Diagnostics Incorporated (NYSE:DGX).

How have hedgies been trading Quest Diagnostics Incorporated (NYSE:DGX)?

At the end of the second quarter, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in DGX a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

No of Hedge Funds with DGX Positions

More specifically, Balyasny Asset Management was the largest shareholder of Quest Diagnostics Incorporated (NYSE:DGX), with a stake worth $65.8 million reported as of the end of March. Trailing Balyasny Asset Management was Two Sigma Advisors, which amassed a stake valued at $54.5 million. Polaris Capital Management, Ariel Investments, and AQR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Now, key hedge funds have been driving this bullishness. Tamarack Capital Management, managed by Justin John Ferayorni, assembled the largest position in Quest Diagnostics Incorporated (NYSE:DGX). Tamarack Capital Management had $19.4 million invested in the company at the end of the quarter. Matthew Hulsizer's PEAK6 Capital Management also made a $3.1 million investment in the stock during the quarter. The other funds with brand new DGX positions are Krishen Sud's Sivik Global Healthcare, Minhua Zhang's Weld Capital Management, and Mario Gabelli's GAMCO Investors.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Quest Diagnostics Incorporated (NYSE:DGX) but similarly valued. These stocks are Canopy Growth Corporation (NYSE:CGC), W.P. Carey Inc. (NYSE:WPC), TransUnion (NYSE:TRU), and Mid-America Apartment Communities, Inc. (NYSE:MAA). This group of stocks' market caps match DGX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CGC,4,23397,-2 WPC,16,41714,3 TRU,30,1002765,1 MAA,13,292955,-8 Average,15.75,340208,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $340 million. That figure was $350 million in DGX's case. TransUnion (NYSE:TRU) is the most popular stock in this table. On the other hand Canopy Growth Corporation (NYSE:CGC) is the least popular one with only 4 bullish hedge fund positions. Quest Diagnostics Incorporated (NYSE:DGX) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks (see the video below) among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on DGX, though not to the same extent, as the stock returned 5.7% during the third quarter and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Disclosure: None. This article was originally published at Insider Monkey.

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